KIRKLAND LAKE GOLD INC. FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) KPMG LLP Chartered Accountants Bay Adelaide Centre 333 Bay Street Suite 4600 Toronto ON M5H 2S5 Telephone (416) 777-8500 Fax (416) 777-8818 Internet www.kpmg.ca INDEPENDENT AUDITORS’ REPORT To the Shareholders of Kirkland Lake Gold Inc. We have audited the accompanying financial statements of Kirkland Lake Gold Inc., which comprise the balance sheets as at April 30, 2011 and April 30, 2010, the statements of operations, comprehensive income (loss) and deficit, cash flows, and changes in shareholders’ equity for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Kirkland Lake Gold Inc. as at April 30, 2011 and April 30, 2010 and its results of operations and KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP. its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants Toronto, Canada July 5, 2011 KIRKLAND LAKE GOLD INC. BALANCE SHEETS AS AT APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) Assets Current assets Cash and cash equivalents Short-term investments (Note 4) Accounts receivable Inventories (Note 5) Prepaid expenses and other current assets Other long-term assets (Note 6) Restricted cash (Note 3) Mineral properties (Note 7) Plant and equipment (Note 8) Liabilities Current liabilities Accounts payable and accrued liabilities Current portion of capital lease Asset retirement obligation (Note 9) Shareholders' Equity Capital stock (Note 10) Authorized Unlimited common shares without par value Issued 69,763,211 (2010 - 67,727,634) common shares Options (Note 11) Warrants (Note 12) Contributed surplus (Note 13) Deficit 2011 2010 $ 25,908,667 $ 25,321,582 2,348,245 10,354,028 554,485 64,487,007 29,323,439 30,232,554 981,585 7,874,369 593,489 69,005,436 519,492 4,952,597 90,748,595 48,995,125 291,980 4,952,597 64,508,733 23,448,589 $ 209,702,816 $ 162,207,335 $ 21,808,973 $ - 21,808,973 3,417,357 25,226,330 13,229,894 76,299 13,306,193 3,223,922 16,530,115 249,183,417 4,223,940 - 10,435,893 (79,366,764) 226,933,558 4,848,210 9,315,584 4,037,799 (99,457,931) 184,476,486 145,677,220 $ 209,702,816 $ 162,207,335 Commitments (Notes 3 and 18) Approved by the Board of Directors: (signed) "Brian E. Bayley" Director (signed) "Brian Hinchcliffe" Director The accompanying notes are an integral part of these financial statements. 3. KIRKLAND LAKE GOLD INC. STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND DEFICIT YEARS ENDED APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) Revenue Mining revenue Expenses Operating costs Stock-based compensation for operational personnel Amortization and depletion Royalties Other Expenses General and administrative Exploration Interest and bank charges Stock-based compensation (Note 11) Writedown of capital assets (Note 8) Interest and other income Income (loss) before future income tax recovery Future income tax recovery (Note 17) 2011 2010 $ 105,176,708 $ 51,231,538 62,159,052 165,178 7,852,621 4,232,238 74,409,089 30,767,619 47,229,654 565,009 4,104,224 2,054,201 53,953,088 (2,721,550) 2,916,848 9,001,224 31,641 248,236 122,104 (731,001) 11,589,052 19,178,567 2,614,680 5,284,627 46,283 1,045,699 994,216 (445,488) 9,540,017 (12,261,567) (912,600) - Income (loss) and comprehensive income (loss) for the year $ 20,091,167 $ (12,261,567) Basic and diluted income (loss) per share Weighted Average number of shares outstanding (Note 10) Diluted Weighted Average number of shares outstanding (Note 10) $ 0.29 $ (0.20) 68,282,898 62,628,013 68,671,100 62,628,013 The accompanying notes are an integral part of these financial statements. 4. KIRKLAND LAKE GOLD INC. STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) Cash flows from (used in) operating activities Income (loss) for the year Items not affecting cash and cash equivalents Future income tax recovery Amortization and depletion Unrealized (gains) losses on investments Stock-based compensation Asset retirement obligation Writedown of capital assets Changes in non-cash working capital items Accounts receivable Inventories Prepaid expenses and deposits Accounts payable and accrued liabilities Other long-term assets Cash flows used in investing activities Purchase of plant and equipment Purchase of short-term investments Restricted cash Additions to mineral properties Cash flows from financing activities Net proceeds from issuance of capital stock, options and warrants Repayment of capital lease Increase (decrease) in cash and cash equivalents Cash and cash equivalents - Beginning of year Cash and cash equivalents - End of year Supplemental cash flow information (Note 20) 2011 2010 $ 20,091,167 $ (12,261,567) (912,600) 7,852,621 (53,829) 413,414 193,435 122,104 27,706,312 (1,366,660) (2,479,659) 39,004 5,548,500 - 4,104,224 (54,125) 1,610,708 182,488 994,216 (5,424,056) 3,180,873 (486,226) (144,543) 2,144,354 (227,512) 29,219,985 (224,500) (954,098) (25,881,660) 4,964,801 - (30,848,881) (51,765,740) (11,657,745) (6,540,287) (218,041) (22,522,056) (40,938,129) 19,207,282 (76,299) 19,130,983 (3,414,772) 29,323,439 69,509,455 (99,988) 69,409,467 27,517,240 1,806,199 $ 25,908,667 $ 29,323,439 The accompanying notes are an integral part of these financial statements. 5. KIRKLAND LAKE GOLD INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) Capital stock Balance, beginning of year Exercise of stock options Exercise of warrants Shares issued to purchase mining claims Private placements Share issue costs Share proceeds allocated to warrants Balance, end of year Options Balance, beginning of year Attribution of options granted Exercise of options Cancellation of options Forfeiture of options Balance, end of year Warrants Balance, beginning of year Warrants issued in private placements Exercise of warrants Expiry of warrants Balance, end of year Contributed surplus Balance, beginning of year Expiry of warrants Cancellation of options Forfeiture of options Future tax recovery on expiration of warrants Balance, end of year Deficit Balance, beginning of year Income (loss) and comprehensive income (loss) for the year Balance, end of year 2011 2010 $ 226,933,558 $ 3,281,417 18,968,442 - - - - $ 249,183,417 $ 165,755,459 310,880 4,699,148 50,000 69,137,375 (3,703,720) (9,315,584) 226,933,558 $ $ $ $ $ $ $ $ 4,848,210 $ 413,414 (1,027,785) (9,899) - 4,223,940 $ 9,315,584 $ - (2,014,788) (7,300,796) - $ 4,037,799 $ 7,300,796 9,898 - (912,600) 10,435,893 $ 3,630,924 1,610,708 (112,580) (256,132) (24,710) 4,848,210 1,499,541 9,315,584 (821,650) (677,891) 9,315,584 3,079,066 677,891 256,132 24,710 - 4,037,799 (99,457,931) $ 20,091,167 (79,366,764) $ (87,196,364) (12,261,567) (99,457,931) The accompanying notes are an integral part of these financial statements. 6. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) 1. Basis of Presentation Kirkland Lake Gold Inc. (the Company) owns gold mining and milling operations in Kirkland Lake, Canada, which were inactive when acquired in December 2001. The financial statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles on a basis which contemplates that the Company will be able to continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The future operating cash flows and profitability of the Company are affected by various factors, the most significant of which are the amount of gold produced and sold, the market price of gold, operating costs, and the level of exploration activity and other discretionary costs and activities. These factors are influenced by the ongoing discovery of economically recoverable reserves and the economies of scale envisaged in the current expansion project from future production on its properties in Kirkland Lake. The Company seeks to manage the risks associated with its business; however, many of the factors affecting these risks are beyond the Company’s control. All dollar amounts are stated in Canadian dollars or otherwise as indicated. 2. Significant accounting policies Future changes in significant accounting policies The Canadian Accounting Standards Board has confirmed January 1, 2011 as the date that International Financial Reporting Standards (‘‘IFRS’’) will replace Canadian GAAP for publicly accountable enterprises. As a result, the Company will report under IFRS for interim and annual periods beginning May 1, 2011, with comparative information for 2010 restated under IFRS. Adoption of IFRS as Canadian GAAP requires the Company to make certain accounting policy choices and could materially impact its reported financial position and results of operations. Use of estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, in particular in respect of property, plant and equipment, mineral properties, asset retirement obligation, stock based compensation and valuation of future income tax liabilities, that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from these estimates and these differences could be material. 7. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) Financial instruments All financial instruments included on the balance sheet are either classified as held for trading, held-to-maturity, available-for-sale, loans and receivables or other financial liabilities. Financial instruments classified as held to maturity, loans and receivables, and other financial liabilities are measured at amortized cost. Instruments classified as held for trading are measured at fair value with unrealized gains and losses recognized on the statement of operations. The Company's financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, other long-term assets, restricted cash and accounts payable and accrued liabilities, as follows: Cash and cash equivalents Short-term investments Mutual funds Treasury bills Accounts receivable Other long-term assets Restricted cash Accounts payable and accrued liabilities Capital lease Comprehensive income Held for trading Held for trading Held to maturity Loans and receivables Held to maturity Held for trading Other financial liabilities Other financial liabilities Comprehensive income is the change in shareholder's equity during a period from transactions and events from sources other than the Company's shareholders. The Company reports a statement of operations, comprehensive income or loss and accumulated other comprehensive income or loss is added to the shareholders' equity section of the balance sheet when components to be recognized in the comprehensive income or loss exist. There were no material components to be recognized in comprehensive income or loss during the year. As a result, net income for the period represents comprehensive income. Cash and cash equivalents Cash and cash equivalents include cash and short-term investments with an initial maturity of 90 days or less at the date of acquisition. Investments The Company holds investments in various funds of a fund Company and Government of Canada Treasury Bills with maturity dates greater than 90 days at the date of acquisition but less than 365 days. Inventories Dore bars and gold in process are recorded at the lower of average production cost and net realizable value. Production costs include all direct costs plus an allocation of fixed costs associated with the mine site. The Company uses a rolling period average cost to value the inventory of gold on hand. Mine operating supplies are valued at the lower of average cost and net realizable value as measured by replacement cost. Mineral properties and deferred exploration costs The Company expenses exploration expenditures and near term ore development costs as incurred. Property acquisition costs and longer term development costs incurred to expand ore reserves are deferred and depleted on a units - of - production basis over proven and probable reserves which are currently accessible by the Company. Management's estimate of gold price, 8. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) recoverability, proven and probable reserves, operating, capital and reclamation costs are subject to risk and uncertainties affecting the recoverability of the Company's investment in mineral properties. The Company assesses capitalized costs for indicators of impairment on an annual basis or more frequently if changes in circumstances suggest that possible impairment may exist. Where information is available and conditions suggest impairment, estimated future net cash flows are calculated using estimated future prices, reserves and operating, capital and reclamation costs on an undiscounted basis. If the net carrying value of the property exceeds the estimated future net cash flows, the property will be written down to fair value. Plant and equipment Plant and equipment is recorded at cost and amortized on a straight line basis over the shorter of the remaining mine life and the following periods: Computer equipment Vehicles Mine and mill equipment Buildings Capital spares Asset retirement obligation 3 years 5 years 10 - 15 years 10 - 15 years 2 years Future obligations to retire an asset or property are recognized and recorded as a liability at fair value as at the time the asset is acquired or the event occurs giving rise to such an obligation. At each reporting period, asset retirement obligations are increased to reflect the interest element (Accretion expense) considered in the initial fair value of the measurement of the liabilities. In addition, an asset retirement cost is added to the carrying amount of the related asset and amortized over the life of the asset. The capitalized asset retirement cost is amortized on the same basis as the related asset and along with the accretion expense, is included in net income. Revenue recognition Revenue is recognized upon title transfer. On January 7, 2010, the Company entered into a new agreement with the purchaser, where title transfer is defined as receipt of payment. Prior to January 7, 2010, revenue was recognized upon title transfer when the gold was received by the purchaser. Adjustments to accounts receivable, if any, between the date of title transfer and the settlement date are recorded when determined. The Company from time to time enters into commodity contracts to minimize its exposure to fluctuations in the price of gold. Any gains or losses are recorded in revenue. Foreign currency translation The Company generally seeks to sell its gold in Canadian dollars. To the extent these transactions are denominated in foreign currencies, they are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction date. Gains and losses arising from restatement of foreign currency monetary assets and liabilities and transactions are included in the statement of operations. 9. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) Income taxes The Company uses the liability method of accounting for future income taxes. Under this method of tax allocation, future income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that are expected to be in effect in the periods in which the future income tax assets or liabilities are expected to be settled or realized. A valuation allowance is provided to the extent that it is more likely than not that future income tax assets will not be realized. Stock based compensation The Company has a stock-based compensation plan which is described in Note 11. The Company accounts for stock options using the fair value method. Under this method, compensation expense for stock options granted is measured at fair value at the grant date using the Black-Scholes valuation model and recognized over the vesting period of the options granted. Consideration paid on the exercise of stock options is credited to capital stock. Flow-through shares The Company has from time to time issued flow through shares to finance a portion of its exploration program. Pursuant to the terms of flow through share agreements, the tax deductions associated with the expenditures are renounced to the subscribers. To recognize the foregone tax benefits, share capital is reduced and a future income tax liability is recognized as the related expenditures are renounced. This future income tax liability is then reduced by the recognition of previously unrecorded future income tax assets on unused tax losses. Earnings / Loss per common share The Company follows the treasury stock method in the calculation of diluted earnings per share. Basic earnings or loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding for the relevant period. Diluted income or loss per common share is computed by dividing the net income or loss applicable to common shares by the sum of the weighted average number of common shares issued and outstanding and all additional common shares that would have been outstanding if potentially dilutive instruments were converted. 3. Restricted cash Restricted cash includes: Letters of Credit: Ministry of Northern Development, Mines and Forestry Independent Electricity System Operator of Ontario 2011 2010 $ $ 4,452,597 $ 500,000 4,952,597 $ 4,452,597 500,000 4,952,597 Letters of credit are secured by the GIC investments as disclosed in Note 4 below. 10. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) 4. Investments Investments include: Government of Canada Treasury Bill bears interest at 0.85%, matures May 26, 2011 Government of Canada Treasury Bill bears interest at 0.8%, matures June 23, 2011 Government of Canada Treasury Bill bears interest at 1.06%, matures July 4, 2011 Government of Canada Treasury Bill bears interest at 1.12%, matures August 4, 2011 Guaranteed Investment Certificate bears interest at 1.07%, matures May 12, 2011 Investment in Guaranteed Investment Certificates Investment in Government of Canada Treasury Bills Investment in mutual funds Reclassified to restricted cash 2011 5,001,570 $ $ 2010 - 9,999,254 5,000,000 5,000,000 5,000,000 - - - - 15,000,000 19,999,196 185,955 (4,952,597) $ 25,321,582 $ 30,232,554 273,355 (4,952,597) Letters of credit are in place with the Ministry of Northern Development, Mines and Forestry to cover the estimated total costs of reclamation and site restoration (Note 9), for $4,452,597, and with the Independent Electricity System Operator of Ontario to secure the provision of electricity, for $500,000. The letters of credit are secured by a portion of the $5,000,000 Guaranteed Investment Certificate purchased during the current period. 5. Inventories Gold in process Mine operating supplies Dore bars 6. Other long-term assets Other long-term assets include: Security deposits Employee relocation loans receivable 7. Mineral properties 2011 2010 $ 7,255,286 $ 3,098,742 - $ 10,354,028 $ 4,063,761 2,300,907 1,509,701 7,874,369 2011 69,729 $ 449,763 519,492 $ 2010 67,980 224,000 291,980 $ $ The Company's mineral properties comprise five contiguous mining properties in and around Kirkland Lake, Ontario. Balance - Beginning of year Development and rehabilitation costs Depletion Balance - End of year 2011 $ $ 64,508,733 $ 30,848,881 (4,609,019) 90,748,595 $ 2010 43,319,427 22,572,056 (1,382,750) 64,508,733 11. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) Acquisition allocation Underground development Underground pumping Mill and surface facilities Lakeshore property Acquisition allocation Underground development Underground pumping Mill and surface facilities Lakeshore property $ $ $ 8. Plant and equipment $ 74,384,058 $ COST ACCUMULATED DEPLETION 2,155,023 $ 99,877,192 2,050,942 149,371 1,000,411 105,232,939 $ 416,098 $ 13,054,539 646,991 47,810 318,906 14,484,344 $ COST ACCUMULATED DEPLETION 2,155,023 $ 69,028,311 2,050,942 149,371 1,000,411 310,880 $ 8,683,069 562,041 41,665 277,670 9,875,325 $ 2011 1,738,925 86,822,653 1,403,951 101,561 681,505 90,748,595 2010 1,844,143 60,345,242 1,488,901 107,706 722,741 64,508,733 Balance - Beginning of year Additions Amortization Writedown Balance - End of year Computer equipment Mine and mill equipment Vehicles Buildings Capital projects Computer equipment Mine and mill equipment Vehicles Buildings Capital projects 2011 23,448,589 $ 28,912,242 (3,243,602) (122,104) 48,995,125 $ 2010 15,330,253 11,834,028 (2,721,476) (994,216) 23,448,589 $ $ COST ACCUMULATED AMORTIZATION 795,088 $ 38,722,924 174,910 6,721,074 18,925,610 65,339,606 $ 605,399 $ 14,061,849 125,462 1,551,771 - 16,344,481 $ COST ACCUMULATED AMORTIZATION 609,155 $ 28,494,586 147,552 2,561,536 4,562,409 36,375,238 $ 597,137 $ 10,742,610 105,626 1,481,276 - 12,926,649 $ $ $ $ $ 2011 189,689 24,661,075 49,448 5,169,303 18,925,610 48,995,125 2010 12,018 17,751,976 41,926 1,080,260 4,562,409 23,448,589 Capital projects represent assets not being depreciated. In 2010 included under mine and mill equipment are assets under capital lease in the amount of $137,160. 12. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) 9. Asset retirement obligation On April 29, 2011 the Director of Mine Rehabilitation for the Ontario Ministry of Northern Development, Mining and Forestry (MNDMF) accepted the Company's reclamation and site restoration plan in connection with the Kirkland Lake properties with no revisions to the anticipated cash flows. The Company's best estimate of the total costs of reclamation and site restoration at April 30, 2011 are $5,524,130 (2010 - $5,524,130) and financial assurance has been provided to the MNDMF by way of a letter of credit in the amount of $4,452,597 (Note 4). A reconciliation for asset retirement obligation is as follows: Balance - Beginning of year Accretion Balance - End of year 2011 3,223,922 $ 193,435 3,417,357 $ 2010 3,041,434 182,488 3,223,922 $ $ The provision for asset retirement obligations is based on the following key assumptions. • • • • The total undiscounted cash flow as at April 30, 2011 is $5,524,130. The expected settlement to be in 2024 - 2026. A credit adjusted risk free rate at which the estimated payments have been discounted of 6%. An inflation rate of 2%. 10. Capital stock Balance - April 30, 2009 58,548,898 $ 165,755,459 Number of shares Amount Exercise of options Exercise of warrants Private placements Shares issued to purchase mining claims Share issuance costs Share proceeds allocated to warrants Balance - April 30, 2010 Exercise of options Exercise of warrants Balance - April 30, 2011 33,000 705,000 8,435,500 5,236 - - 310,880 4,699,148 69,137,375 50,000 (3,703,720) (9,315,584) 67,727,634 226,933,558 296,100 1,739,477 3,281,417 18,968,442 69,763,211 $ 249,183,417 13. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) (a) (b) On September 10, 2009, the Company closed a private placement of 4,555,000 units at a price of $8.15 per unit for gross proceeds of $37,123,250. Each unit consisted of one common share and one third of a share purchase warrant. Each whole warrant is exercisable to purchase a further common share at a price of $9.85 until October 10, 2010. The share purchase warrants issued as part of this placement have been recorded at a fair value of $6,855,184. The Offering was underwritten by Wellington West Capital Markets Inc. (WWCMI), which was paid a cash fee and issued broker warrants to purchase 273,300 common shares of the Company until September 10, 2010 at a price of $8.15 each. The share purchase warrants issued to WWCMI as part of this placement have been recorded at a fair value of $1,565,462 and recorded as a cost of the placement. In addition the Company incurred further commissions, fees and legal costs totaling $1,985,700 in connection with this placement. The following assumptions were used to calculate fair value: Dividend yield Risk free interest rate Expected stock volatility Expected life NIL 0.54% 134 - 136% 1 - 1.08 years On February 4, 2010, the Company closed a private placement of 3,880,500 units at a price of $8.25 per unit for gross proceeds of $32,014,131. Each unit consisted of one common share and one third of a share purchase warrant. Each whole warrant is exercisable to purchase a further common share at a price of $10.00 until March 4, 2011. The share purchase warrants issued as part of this placement have been recorded at a fair value of $1,385,425. The underwriters, WWCMI and Dundee Securities were paid a cash fee and issued broker warrants to purchase 232,830 common shares of the Company until February 4, 2011 at a price of $8.90 each. The share purchase warrants issued as part of this placement have been recorded at a fair value of $259,537 and recorded as a cost of the placement. In addition the Company incurred further commissions, fees and legal costs totaling $1,718,020 in connection with this placement. The following assumptions were used to calculate fair value: Dividend yield Risk free interest rate Expected stock volatility Expected life NIL 0.63% 57 - 61% 1 - 1.08 years Diluted weighted average number of shares outstanding Basic weighted average shares outstanding: Dilutive stock options Diluted weighted average shares outstanding 2011 68,292,898 378,202 68,671,100 2010 62,628,013 - 62,628,013 Dilutive stock options and warrants were determined using the Company’s average share price for the period. The average share price used was $11.25 and $8.74, respectively. For 2011, there were no anti-dilutive stock options: and for 2010, all potentially dilutive stock options and warrants were excluded from the dilutive calculation as they would have been anti-dilutive due to the loss for the year. 14. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) 11. Options The Company has adopted a stock option plan which allows the Company to grant options to directors, senior officers and employees of and consultants to the Company and employees of a corporation providing management services to the Company. The aggregate number of shares which may be subject to issuance pursuant to options granted under this plan is 10% of outstanding shares. The plan provides that the exercise price of an option granted under the plan shall not be less than the market price at the time of granting the option. Options have a maximum term of 10 years and terminate on the 90th day after the optionee ceased to be any of a director, officer, consultant or employee; or the earlier of the 90th day and the third month after the optionee ceased to be an employee or officer if the optionee is subject to the tax laws of the United States of America. Notwithstanding that options can have a maximum term of 10 years it is presently the policy of the Company to issue options for terms of five years. The change in stock options during the years ended April 30 is as follows: Options outstanding - Beginning of year Granted Exercised Expired Forfeited Cancelled Options outstanding - End of year Options exercisable - End of year 2011 Weighted average exercise price $ $ $ 7.55 8.20 7.61 - - 7.90 7.56 7.51 Number of shares 1,404,500 50,000 (296,100) - - (2,500) 1,155,900 1,088,400 Number of shares 1,468,000 35,000 (33,000) - (14,000) (51,500) 1,404,500 2010 Weighted average exercise price $ 7.62 9.06 6.01 - 7.90 11.47 7.55 814,250 $ 7.71 The following table summarizes information about stock options outstanding and exercisable at April 30, 2011: Exercise price $ 6.99 6.99 7.90 8.20 8.65 9.02 9.11 Options outstanding 250,000 428,500 159,900 50,000 232,500 20,000 15,000 1,155,900 Options exercisable 250,000 428,500 159,900 - 232,500 10,000 7,500 1,088,400 Outstanding options weighted average remaining life (years) 2.31 2.39 2.04 4.39 0.75 3.54 3.68 2.12 Exercisable options weighted average remaining life (years) 2.31 2.39 2.04 - 0.75 3.54 3.68 1.99 15. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) The fair value of each option at the date of grant was estimated using the Black-Scholes option- pricing model with the following assumptions: Expected life of options Risk-free interest rate Expected stock price volatility Expected dividend yield Weighted-average fair value of options 2011 1.91 - 2.71 years 1.44 - 1.72% 83.70 - 96.28% 0% 4.21 $ $ 2010 1.91 - 2.64 1.51 - 1.97% 96.8 - 110.1% 0% 5.23 Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. The value ascribed to options recorded as a component of shareholders' equity is as follows: Balance - Beginning of year Attribution of options granted Exercise of options Cancellation of options Forfeiture of options Balance - End of year 12. Warrants 2011 4,848,210 $ 2010 3,630,924 $ 413,414 (1,027,785) (9,899) - $ 4,223,940 $ 1,610,708 (112,580) (256,132) (24,710) 4,848,210 The changes in warrants outstanding are as follows: Number of warrants 2011 Weighted average exercise price Number of warrants - 2010 Weighted average exercise price Warrants outstanding - Beginning of year Issued Exercised Expired Warrants outstanding - End of year 3,537,936 $ - (1,739,477) (1,798,459) 9.72 - 9.75 9.70 930,000 3,537,936 (705,000) (225,000) $ 7.31 9.72 5.50 13.00 - $ - 3,537,936 $ 9.72 16. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) The value ascribed to unexercised warrants recorded as a component of equity is as follows: Balance - Beginning of year Warrants issued in private placements Exercise of warrants Expiry of warrants Balance - End of year 13. Contributed surplus Balance - Beginning of period Tax impact of expiry of warrants Expiry of warrants Cancellation of options Forfeiture of options Balance - End of period 14. Financial instruments 2011 9,315,584 $ 2010 1,499,541 - (2,014,788) (7,300,796) - $ 9,315,584 (821,650) (677,891) 9,315,584 $ $ 2011 4,037,799 $ 2010 3,079,066 $ (912,600) 7,300,796 9,898 - $ 10,435,893 $ - 677,891 256,132 24,710 4,037,799 The Company’s financial instruments consist of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, security deposits, accounts payable and accrued liabilities. At April 30, 2011, the carrying values of these instruments approximate their fair values based on the nature of these instruments. Fair Value Measurements of Financial Assets and Liabilities Recognized in the Balance Sheet The amendments to Section 3862 (Note 2) introduce a fair value hierarchy that reflects the significance of inputs used in making fair value measurements as follows: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e.: as prices) or indirectly (i.e.: derived from prices); and Level 3 – inputs for the asset or liability that are not based on observable market data. The levels in the fair value hierarchy into which the Company’s financial assets and liabilities measured and recognized in the balance sheet at fair value are categorized are as follows: Cash and cash equivalents Short-term investments Mutual funds Treasury bills Restricted cash Accounts payable and accrued liabilities Interest Rate and Credit Risk Level 1 Level 1 Level 2 Level 1 Level 2 The Company has significant cash and short-term investment balances. The Company currently invests excess cash in fixed rate Government of Canada Treasury Bills with maturity dates of approximately 90 days. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal risk. 17. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific accounts, historical trends and other information when necessary. As at April 30, 2011, there were no receivables past due. There are no fixed, floating rate or interest free financial liabilities by way of borrowing. Deposits held with banks may exceed the amount of insurance provided on such deposits. Liquidity Risk The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As at April 30, 2011, the Company had a cash and cash equivalents and short term investments balance of $51,230,249 to settle financial liabilities of $21,808,973. All of the Company's financial liabilities are current liabilities which will mature within one year of the balance sheet date. Currency Risk Sales of gold dore bars and the majority of the Company’s expenses are incurred in Canadian Dollars therefore the Company is substantially protected against movements in foreign exchange. Sensitivity Analysis The carrying amount of financial instruments approximates their fair market value. The movement on cash and cash equivalents and short-term investments interest rates by a plus or minus 1% change would have no material impact on the value of those items. 15. Capital disclosures The Company's capital under management includes shareholders' equity of $184,476,486. The Company's objectives when managing capital are: (a) (b) (c) (d) to safeguard the Company's ability to continue as a going concern. provide an adequate return to shareholders. to raise sufficient proceeds from share issuances to meet any deficiencies in operations. to provide sufficient funding to support on-going exploration and capital development plans. The Company manages its capital structure and makes adjustments to it to meet the above objectives. To date management has used primarily equity issuances in order to raise funds as required. Excess funds are then invested in highly liquid, interest bearing instruments until required. 16. Related party transactions During the year the Company paid office facilities and administration services in the amount of $43,500 (2010 - $42,000) to a Company related by directors in common. This transaction was in the normal course of operations and was measured at the exchange value which represented the amount of consideration established and agreed to by the related parties. 18. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) 17. Income taxes (a) Income taxes expenses vary from the amount that would be computed by applying the combined federal and provincial income tax rate of 27.83% (2010 - 30.67%) to income (loss) before income taxes as follows: Net Income (loss) before income taxes Expected income taxes Income tax benefit not recognized Non-deductible items Income tax recovery 2011 2010 $ $ $ 19,178,567 $ (12,261,567) (3,760,623) 3,281,242 479,381 - 5,337,395 $ (6,362,741) 112,746 (912,600) $ (b) Future income taxes reflect the net tax effects of non-capital loss carry-forwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s future tax assets are as follows: Future income tax assets/(liabilities) Tax loss carry-forwards Mineral properties Asset retirement obligation Property, plant and equipment Share issuance costs Less: Valuation allowance Net future tax assets 2011 2010 $ $ 7,287,742 $ 7,486,467 854,339 (206,383) 906,774 16,328,939 (16,328,939) - $ 15,415,079 4,592,509 805,981 512,785 937,473 22,263,827 (22,263,827) - (c) taxable income in future years. These losses expire during the following years: The Company has non-capital losses, which may be carried forward and applied against 2015 2026 2027 2029 2030 $ $ 7,834,330 1,870,252 4,032,443 6,994,817 7,891,762 28,623,604 19. KIRKLAND LAKE GOLD INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2011 AND 2010 (EXPRESSED IN CANADIAN DOLLARS) 18. Commitments As at April 30, 2011, capital commitments included: Capital Commitments (All commitments in 000s of Canadian Dollars) Plant and Equipment Underground Development Total $000 15,400 143 15,543 $ $ Capital commitments include the expansion project and ongoing capital project commitments. Major commitments include: i) the new substation project, ii) the hoisting upgrade and compressor projects and iii) mobile underground equipment required for maintaining and supporting higher production levels. The Company had an outstanding commodity contract with Johnson Matthey Plc. to fix the price of 5,785 ounces of gold at an average price of $1,452 per ounce to be delivered under this contract. As part of the commodity contract Johnson Matthey Plc. has a right to make a margin call if the price of gold falls below the price of the commodity contract until the full amount of the commodity contract has been satisfied. At year end, $16,000 was on deposit to cover the margin calls made by Johnson Matthey Plc. A 4% net smelter royalty is payable to Kinross Gold Corporation on all gold produced by the Company. The royalty terminates upon aggregate payments of $15 million. During the year ended April 30, 2011, royalties under this agreement amounted to $4,202,218 (2010 - $2,044,427). Of the $15 million the Company has paid $11,909,270. 19. Segmented information The Company has one operating segment consisting of a mining and milling operation located in Kirkland Lake, Canada. During the years ended April 30, 2011 and 2010 all of the Company's capital assets, revenues earned and operations were in Canada, and all mining revenue was earned from one customer. 20. Supplemental cash flow information Cash and cash equivalents comprise cash on deposit with Canadian chartered banks, lines of credit and treasury bills. During the years ended April 30, 2011 and 2010, the Company conducted non-cash financing and investing activities as follows: Value assigned to options/warrant exercised Issuance of shares for purchase of mineral properties 2011 3,042,573 $ $ - 2010 934,230 50,000 $ $ 21. Subsequent event Subsequent to the year end the letter of credit to the Independent Electricity System Operator of Ontario was increased to $851,611 (Note 3). 20.